Measurement Error in Imputed Consumption

37 Pages Posted: 24 Sep 2018

See all articles by Scott R. Baker

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

Lorenz Kueng

University of Lugano - Faculty of Economics; Swiss Finance Institute; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Northwestern University - Kellogg School of Management

Steffen Meyer

University of Southern Denmark - Department of Business and Economics; Danish Finance Institute

Michaela Pagel

Columbia University - Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 2018

Abstract

Because of limitations in survey-based measures of household consumption, a growing literature uses an alternative measure of consumer expenditures commonly referred to as "imputed consumption." This approach typically utilizes annual snapshots of household income and wealth from administrative tax registries to calculate household spending as the residual of the household budget constraint. In this paper we use transaction-level retail investment data to assess the measurement error that can result in imputed consumption due to intra-year changes in asset values and composition. We show that substantial discrepancies between imputed and actual spending can arise due to trading costs, asset distributions, variable trade timing, and volatile asset prices between two annual snapshots. While these errors tend to be quantitatively small and centered around zero on average, we demonstrate that they vary across individuals of different types and income levels and are highly correlated with the business cycle. We end by suggesting ways to minimize the impact of these imputation errors in future research and we discuss which research questions are least likely to suffer from such errors.

Suggested Citation

Baker, Scott R. and Kueng, Lorenz and Meyer, Steffen and Pagel, Michaela, Measurement Error in Imputed Consumption (September 2018). NBER Working Paper No. w25078, Available at SSRN: https://ssrn.com/abstract=3254072

Scott R. Baker (Contact Author)

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

Lorenz Kueng

University of Lugano - Faculty of Economics

Via Giuseppe Buffi 13
Lugano, TI 6904
Switzerland

HOME PAGE: http://www.usi.ch/en

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

HOME PAGE: http://www.sfi.ch/en/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

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Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
+1 (847) 491-7843 (Phone)
+1 (847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/

Steffen Meyer

University of Southern Denmark - Department of Business and Economics ( email )

DK-5230 Odense
Denmark

Danish Finance Institute ( email )

Michaela Pagel

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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